Add goods, services to diversify your propane business

Tamera Kovacs

In the Know is a monthly partnership between LP Gas magazine and Propane Resources. Our focus this month is on diversification, addressed by financial consultant and business valuations and sales expert Tamera Kovacs.

Q. We’ve noticed a trend with fuel oil dealers adding propane to the list of fuels they deliver. What’s driving this trend, and are there any goods or services propane retailers have been adding to their businesses recently?

A. Business owners by nature are entrepreneurial. They like to build and grow value. Seasonal business owners are particularly interested in diversifying into off-peak businesses to use their current staffing resources. While seasonality is often a reason for diversification, it’s not the only reason businesses explore other opportunities.

For many businesses, propane is a natural progression. It’s not just fuel oil dealers who have entered the propane business: farmer cooperatives, rural electric cooperatives and heating and appliance businesses have all expanded into the propane industry. Propane is an optimal and attractive industry for companies looking to diversify. While entry into the propane business is capital intensive, it provides great returns on the capital invested and can build significant value over time, if properly managed and operated.

Fuel oil is still a viable source for heating in parts of America, but many fuel oil dealers have experienced the trend of more customers switching to propane when replacing their heating system. Propane provides customers with the same fundamental needs as fuel oil: warming homes and heating water. While operating a propane business is similar to a fuel oil business, the propane business has higher requirements when it comes to capital investment, safety training and margin needs. To build long-term value in the propane business, companies need to base their business decisions and operational methods on the practices that will build long-term value such as tank ownership. In order to do this, the company will need to make a significant capital investment.

The key for retail propane companies adding “successful” non-propane businesses to their core propane business is tied to dedicating as much time and energy to the new business as they do propane. If propane is the core business, the company needs to make sure they have a strong team in place to continuously focus on the propane business before divesting into a new business. It would be a tragedy to have the propane business suffer from building a new business. The last thing you want is to lose focus on your propane business because everyone is focusing on making the new business successful.

Seasonal summer-peak or routed distribution businesses tend to have a higher success rate for new companies coupled with the propane businesses. A few business lines that we have seen succeed in tandem with propane businesses include:

• Lawn care
• Pool and patio
• Ice manufacturing and distribution
• Bird seed and nursery
• Water distribution
• HVAC
• Construction
• Hardware store
• Gas stations
• Property management
• Rental storage units
• Delivery of coal, wood or pellets as heating sources

Think about the businesses you’ve seen operating during the summer months and wondered how they survive during the winter months. The keys to starting a new business are finding a business that fits in your off-peak season, has a need in your community and one that sparks passion in you. Just like the propane business, you will need to learn the business, understand the margin requirements to cover your operating expenses and capital investment.

Tamera Kovacs is a financial consultant and industry expert in business valuations and sales with Propane Resources. She can be reached at tamera@propaneresources.com or 913-262-0196.